Capital Gains Tax on Real Estate Sale (What to Know)

Thinking of selling your US property? 

Don’t rush into it.

As a high-net-worth US citizen, resident or investor, you’re likely familiar with the intricacies of the country’s complex financial laws.

However, the US tax system, especially when it comes to capital gains taxes (CGT) on property, is another beast altogether.

When it comes to US property and taxes, what you don’t know can definitely hurt you. One wrong move and you could find yourself facing a hefty tax bill.

To guard against such an eventuality, the Nomad Capitalist team has put together this in-depth guide exploring capital gains costs, how they work with real estate and how you could legally lower them.

What is Capital Gains Tax?

At its core, CGT is a tax levied on the profit you make when you sell an asset that has increased in value. 

Assets can be a variety of things, such as stocks, bonds, dividends, pensions, cryptocurrency and property. 

The key metric is your gains – the difference between the asset’s cost basis and sale price. 

It’s also important to differentiate between realised and unrealised gains. 

An unrealised gain is a ‘paper profit’ – the increase in value while you still own the asset. Capital gains taxes only apply when you realise the gain, meaning you actually sell the asset and crystallise the profit. 

Therefore, if you bought shares in a tech company for US$10,000 and they’re now worth US$25,000, you have an unrealised gain of US$15,000. 

You’d only become liable for capital gains tax when you sell those shares and that US$15,000 profit becomes a reality. 

Capital Gains Tax on Real Estate Sales

While the core principle of capital gains tax remains the same, real estate sales usually have specific considerations. 

The core distinction lies in the adjusted cost basis. This includes the original purchase price, as well as the cost of any capital improvements that add value to the property, minus any depreciation you may have claimed. 

Selling expenses, such as estate agent fees and legal costs, can typically also be deducted. 

In addition, certain exclusions and exemptions may apply, depending on your residency status, how long you have owned the property and whether it was your primary residence. 

Short vs Long-Term Capital Gains on US Real Estate

A key factor to keep in mind when working with the US capital gains tax on property sales is the holding period. 

This is because the US tax system divides capital gains into two categories: short-term and long-term. The difference in tax rates between them is where a lot of people get caught out.

If you sell a property you’ve owned for one year or less, any profit is considered a short-term capital gain. 

Short-term gains are taxed as ordinary income. The top rate for the biggest earners can be as much as 37% (plus state taxes, where applicable). 

There’s no special, lower tax rate for short-term gains. 

If you hold the property for more than one year before selling, the profit qualifies as a long-term capital gain. 

Long-term capital gains are taxed at preferential rates, which are a lot lower than ordinary income tax rates. 

These rates depend on your taxable income, but for 2025, they’re generally 0%, 15% or 20%. 

For most high-net-worth individuals, the long-term capital gains rate will be either 15% or 20%, which is a much better rate than 37% for short-term gains.

How Do I Calculate the Real Estate Tax?

Now, let’s explore how to determine your capital gain on a US property sale.

Step 1: Determine Your Realised Amount

This is the total amount you receive from the sale – essentially, the sale price.

Step 2: Determine Your Adjusted Basis

This is your original cost, adjusted for improvements, depreciation and certain expenses. 

Here’s a simple formula to use:

• Adjusted basis = original cost + capital improvements + certain buying/selling costs – depreciation – other deductions

Step 3: Calculate the Gain (or Loss)

To calculate your gains, subtract your adjusted basis (Step 2) from your realised amount (Step 1):

• Realised amount – adjusted basis = capital gain (or loss)

Step 4: Determine the Holding Period

As discussed in the previous section, determine whether your gain is short-term or long-term, as that will affect your rate. 

Step 5: Apply the Correct Tax Rate

Apply the applicable tax rate based on the holding period determined in Step 4. 

Using an example, let’s say you sold a US property for US$1,000,000 (your realised amount).

You originally bought it for US$600,000, spent US$100,000 on a significant renovation (capital improvement) and claimed US$50,000 in depreciation over the years. Plus, selling costs of US$5,000.

You’re adjusted basis would then be: 

• US$600,000 + US$100,000 + US$5,000 – US$50,000 = US$655,000.

Therefore, your capital gain is calculated as: 

• US$1,000,000 – US$655,000 = US$345,000.

If you held the property for more than a year, this US$345,000 gain would be taxed at the long-term capital gains rates. For those in the higher part of the bracket, that means you’ll pay 20% compared to a short-term gains rate of 37%. 

Selling a Primary Residence vs a Secondary Residence

US tax law offers a tax exclusion to homeowners who sell their main home. 

Sellers of a primary residence can exclude a sizable US$250,000 to US$500,000 from their tax through the Section 121 capital gains tax exclusion.

To qualify for Section 121, you must satisfy both an ownership test and a use test within a five-year period preceding the sale:

• For the ownership test, you must have owned the home for at least two years
• For the use test, you must have used the home as your primary residence for at least two years 
• These two years need not be continuous – short, temporary absences are generally permitted, even if used as a rental property during those periods.

Exclusion limits:

• Single filers: Up to US$250,000 of capital gain may be excluded
• Married filing jointly: Up to US$500,000 of capital gain may be excluded (if both spouses meet the use test and at least one meets the ownership test).

5 Strategies to Reduce Capital Gains Tax on Real Estate Sales

Now that we know how capital gains tax works, let’s go over the perfectly legitimate ways to minimise your liability when selling US property.

1. Deferring Capital Gains

Sometimes, the best way to deal with a tax bill is to postpone it. 

Deferring capital gains doesn’t make the tax disappear entirely, but it can buy you valuable time – perhaps to move into a lower tax bracket or to reinvest the proceeds in a way that generates further benefits. 

Within this category, the 1031 Exchange is the most common method. 

This classic move for real estate investors lets you swap one investment property for another ‘like-kind’ property without triggering immediate capital gains tax. 

And no, you can’t trade your apartment building for a private jet – ‘like-kind’ means real estate for real estate, and it’s strictly for investment properties, not your primary residence.

Another, more complex, option involves opportunity zones. 

These are designated areas ripe for investment. By ploughing capital gains into opportunity zone projects, you can defer, and potentially reduce, your tax liability. 

Opportunity zones are not for beginners due to the long-term commitment.

2. Offsetting Gains with Losses

The tax code isn’t entirely heartless. It recognises that losses happen. 

If you have capital losses from other investments, you can use these losses to offset your capital gains on the property sale. 

There are limits, of course. 

You can typically deduct up to US$3,000 of net capital losses against ordinary income each year. However, unused losses can be carried forward to future years, like a tax-saving raincheck.

3. Tax-Loss Harvesting

This is a more proactive (and aggressive) approach to offsetting gains.

Tax-loss harvesting involves strategically selling investments that are currently underperforming to generate losses specifically for tax purposes. 

Think of it as pruning your investment portfolio to encourage healthier growth (and lower taxes).

4. Charitable Giving

Donating appreciated property to a qualified charity can be a tax-savvy move. 

Instead of selling the property and paying capital gains tax, you can donate it directly. You may be able to deduct the fair market value of the property, potentially offsetting other income, while the charity can sell the property without incurring ​​capital gains tax. 

It’s a potential win-win, but, as with most things tax-related, the devil is in the detail. 

Appraisals are usually required, and the rules are intricate, so this isn’t a DIY project.

5. Invest in Capital Gains Tax-Friendly Countries

The last strategy is what we often recommend to our clients. 

The short explanation of this plan is that certain countries have tax-friendly rates for capital gains tax. Some also have tax breaks and some don’t even tax capital gains at all. 

Now, what do you do if you’re already locked into the US and facing a high capital gains charge?

In this scenario, you’ll need to do some careful planning. 

You might have to take the hit, or you might be able to offset a large portion of it. But the quicker you get out and invest in places like New Zealand, Hong Kong or Belgium, for example, the sooner you’ll get more of a return. 

If you’re keen to explore some options within this category, then take a look at this article or, better yet, reach out and let our team help you plan this exciting opportunity. 

Capital Gains Tax on Real Estate Sale: FAQs

Plan Properly for Your Real Estate Sales

The conventional wisdom on US capital gains tax often focuses on immediate mitigation – finding ways to reduce the tax bill on a specific transaction. 

This is important, but a truly smart approach considers the long-term effects of owning and selling property as part of a broader global financial plan. 

The often-overlooked element is opportunity cost. 

Every decision made regarding US property – whether to buy, sell, hold, exchange or donate – carries not only a tax consequence but also an opportunity cost. 

What else could you do with those funds? 

How does this particular asset fit within your overall portfolio diversification and risk management strategy? 

Are you maximising the long-term, after-tax returns, considering your global tax exposure? 

This is about long-term planning.

Seek counsel not just from a tax expert but from a strategic global advisor like our team at Nomad Capitalist. We understand the interplay between US tax law, international tax treaties and your broader financial objectives. 

At Nomad Capitalist, we provide hands-on support to high-net-worth investors and entrepreneurs entering offshore markets, optimising their taxes and, ultimately, going where they’re treated best. Get in touch to find out more.